Commentary

Let’s put a smile on your Facebook

Commentary: The negative story isn’t the whole story.

By

GilMorales

ChrisKacher

NEW YORK (MarketWatch) — The losses that greedy investors took when their “easy money” play in Facebook
FB, -1.44%
didn’t work as they foolishly entered orders to buy it on its debut have led to a spiteful investor and media backlash.

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The sentiment toward Facebook has shifted so dynamically that it probably calls for its own technical indicator, what we might refer to as an “over-loved/over-hated” oscillator not unlike the typical “overbought/oversold” oscillators in use by today’s market technicians. Measured this way, Facebook has no doubt gone from “extremely over-loved” to “extremely over-hated,” in a short period of time.

Because Facebook did not give investors “instant love” as if they were entitled to it, they and the media have gone about the business of spitefully tearing down the company’s business, management and future potential, as well as bringing into question the entire social-networking space as a bubble-in-the-making.

While it all makes for good press, we think the example of Facebook proves once again that investors should at all times and under all circumstances leave their emotions at the door when it comes to investing. Certainly, investors who did not receive timely order reports and lost money due directly to the failure of the Nasdaq trading system should be compensated, but that is not the issue here. Forget the noise, the hype and the fear and greed. If investors want to get a clear picture of Facebook, they must focus on the price/volume action in the face of what has become an extremely skeptical investment community.

We want to take a purely technical view, leaving all the noise of the current debate where it belongs — entirely out of the investment discussion. Investors should always understand that the air is much clearer in the world of price/volume action, particularly when so much dust is being raised in controversy that is, as we see it, simply a lesson in the ability of greed and fear to screw investors up big time.

The first question we address is whether Facebook’s post-IPO performance is unique and such a terrible thing. We could bring up Baidu
BIDU, -1.40%
right after it came public in the summer of 2005 as an example of a stock that burned first-day investors who came in that day.

But another example that strikes as a somewhat similar to Facebook is eBay
EBAY, +0.77%
after it came public in September of 1998 (see Chart 1 below). We can see that eBay rocketed upward on the first day of trading, but 11 trading days later had been cut in half off of its peak following the IPO. At that point the stock found its low and turned back to the upside, pausing only briefly at the IPO-day highs before launching 1,194% higher over the next seven months. Of course, keep in mind that this massive gain occurred during the dot.com bubble boom, but eBay in 1998 still points out that what first looks like a terrible IPO situation can blossom again, particularly when investors least expect it.

Flash forward to 2012 (Chart 2), and we see something similar occurring in Facebook after it recently found a low at the 25.52 price level. The stock pushed over 25% higher from there, and is now consolidating in the low-30s, as of the date of this writing. Now the dust of greed and fear has cleared, Facebook can now give us a true picture of its technical condition. Obviously, the comparison to eBay is not apples to apples, but does remind investors that terrible price action following a widely hyped IPO is not that uncommon in the stock market.

As Chart 2 shows, Facebook the stock has not fallen off the face of the earth as it has moved up off the lows of its current technical pattern to begin establishing what we refer to as a “base” or sideways consolidation.

Also, we note that selling volume has dried up in the pattern, while buying volume has steadily improved into late June. As the summer doldrums descend upon the markets, we would be watching Facebook to see how it continues building its base as it builds on constructive price/volume action off the lows of the pattern.

In a continued bear market environment, Facebook might retest the June lows and try and form a “double bottom” formation or it might buck the market and hold tight sideways as it forms a “cup-with-handle” from here. While others focus on the controversy, we see the seeds of constructive technical action in the stock that investors should remain aware since it is Facebook’s price/volume action that will be the final arbiter of whether the stock will offer any true investment profit potential in the summer of 2012.

Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC and Virtue of Selfish Investing, LLC, cofounders of www.selfishinvesting.com and co-authors of “Trade Like An O’Neil Disciple: How We Made 18,000% in the Stock Market” (Wiley, August, 2010).

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